Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The US Supreme Court’s conservative majority appeared sceptical about the constitutionality of the Securities and Exchange Commission’s in-house courts in a case that throws into question enforcement mechanisms used by agencies across the country.
During oral arguments on Wednesday, most of the high court’s conservative justices questioned whether cases brought in the SEC’s home forum rather than federal courts violated the constitutional right to be heard in court.
Chief Justice John Roberts argued the government was likelier to bring a case “before one of its own agencies than in court”, which would deny a defendant the right to a jury trial. “That’s not just one place or another, it seems to me that undermines the whole point of the constitutional protection in the first place.”
Justice Brett Kavanaugh added that agencies’ tribunals are “at least perceived as not being impartial”, since agency commissioners both bring the enforcement actions and appoint the in-house judges who hear them. “That doesn’t seem like a neutral process.”
A lawyer representing the SEC argued that in-house courts do not snatch cases away from federal courts given the regulator’s mission is different than “trying to write a private wrong”. The SEC is “trying to vindicate the public’s right to fair and honest markets”, he said.
The case, Jarkesy vs SEC, involves a radio talk show host and hedge fund manager, George Jarkesy, whom the regulator charged with fraud in its in-house administrative court in 2013. The SEC accused Jarkesy, who had launched two hedge funds that raised $30mn, of inflating the funds’ asset valuations and lying to investors about their auditor and prime broker as well as raking in inflated fees.
Jarkesy has sought to dismiss this proceeding, but the SEC’s in-house judge rejected his motions. He is now asking the Supreme Court to find the regulator’s in-house court unconstitutional, arguing that it denies defendants their right to a jury trial and flouts separations of power between the legislative and executive branches of government, among other factors, according to court filings.
“Congress has steadily expanded the SEC’s authority over the past several decades and now, like a house that’s been added on to too many times, it’s crushing the original foundation,” Sidney Michael McColloch, a lawyer representing Jarkesy, said on Wednesday.
While the case focuses on the securities watchdog, a broad decision against the use of in-house proceedings by the Supreme Court could threaten a critical enforcement tool used by US federal agencies to adjudicate a broad swath of claims, from social security petitions to securities laws violations.
The Supreme Court’s three liberal justices seemed more sympathetic to agencies’ internal forums. Sonia Sotomayor warned against a “radical change” that would have “consequences across the board” and push all agencies to bring claims in federal court.
Joshua Macey, assistant professor at the University of Chicago Law School, said a decision to end the use of in-house forums would clog federal courts with a wave of cases. Instead, he said, the Supreme Court could be inclined to decide that for certain proceedings — such as charges that include financial penalties — “you’re more likely to have a day in court”.
“It will introduce some amount of uncertainty, and a lot of the questions over the next few years will have to do with what’s in that liminal space where we don’t know whether the matter needs to be decided by” a federal court, Macey added.
The case comes at a time when the Supreme Court, which is split 6-3 between conservative and liberal justices, has shown strong scepticism towards agencies’ authority. Last year, it curbed the Environmental Protection Agency’s ability to limit greenhouse gas emissions from power plants in a landmark ruling that called into question regulators’ rulemaking powers.
“The majority of the Supreme Court has consistently been saying US administrative law in its current form is unconstitutional,” Macey said.
The SEC has the option to bring those same cases in standard federal district courts. It has argued that instead pursuing those charges internally does not violate the constitution.
Bringing cases in-house tends to be less complex for the regulator compared with navigating federal courts, where it potentially faces lengthy discovery processes, jury trials and additional oversight.
The lawyer representing the SEC on Wednesday argued that internal proceedings “can be done more efficiently” and often result in “a lesser sanction”.
The SEC also argued Congress gave it power to adjudicate enforcement proceedings under securities laws as a means to ensure investor protection, according to court filings.
